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Hi guys!

Can someone please explain why in the digram S is crossed out initially from ever offering 10 year bonds?

 Robert Carroll
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Remember that "10" on that original diagram has a specific meaning: offering 10 year bonds and only 10 year bonds. "B" on that diagram means offering both 5 and 10. So S is not prevented from offering 10 year bonds, but instead prevented from offering ONLY 10 year bonds. S could offer only 5 year, or both; it can never offer just 10.

The reason why that's the case is outlined by Jeremy earlier in the thread:
Jeremy Press wrote: Fri Aug 28, 2020 3:49 pm Hi Ari,

Those are quite tricky, so you're definitely getting to the heart of the hardest part of this game!

Let's say, for the second rule, that S does not offer both types of bonds. That means that V cannot offer 5-year bonds (and cannot offer both), and must offer 10-year bonds alone. That fills out the diagram (according to Jon's original sketch) like so:

Screen Shot 2020-08-28 at 3.45.29 PM.png

Since S and V now cannot offer both types, and H/L can never offer both types, there are only two remaining companies that can offer both types: R and G.

Moving on to the third rule, the contrapositive begins from R offering 5-year bonds (but not 10-year and not both), which means L must not offer 10-year bonds, and must therefore offer 5-year bonds. Since L and H cannot offer the same type, H now has to offer 10-year bonds, diagrammed per below:

Screen Shot 2020-08-28 at 3.45.36 PM.png

The S inference is a little head-spinning, admittedly. But, think about what would happen if S offered only 10-year bonds. That would mean V would have to offer both types, which would trigger the second rule (V offering 5-year) and force S to offer both types. So, S has to offer both types!

Let us know if that clears it up!
Robert Carroll

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